For the first time in decades the Chinese economy is slowing down. Whether it is official data, bank research data, or commodity prices, all point to a slowdown.

Many economists predicted this slowdown, but there was one researcher who knew it first. Leland Miller of the China Beige Book operates the most comprehensive system of real-time business surveys in China and claims to have the most reliable and timely data. Each quarter, his on-the-ground researchers contact thousands of businesses across the country and interview high-level executives to find out how the economy there is really doing.

Modeled after the Federal Reserve Beige Book, Miller and his team replicated this approach in China—with stunning results.

Why is Chinese data unreliable?

Even if you believe all of the data out there, it doesn’t actually tell you what you need to know about the Chinese economy. It doesn’t help you to have a GDP number nationally or an inflation number nationally if you’re trying to figure out what’s happening on the ground in China.

The coast operates very different from the middle of the country and some of the periphery regions. China is actually a bunch of little Chinas and looking at the different regions separately and looking at the different sectors can tell you more about China than all of the official data that’s ever been produced.

The official statistics have deep methodological problems; the departments are under-resourced. But what’s really the key here, is that the GDP number doesn’t really tell you much about growth across the economy. So what you want to look at is metrics of firm performance on the ground. You want to look at the credit environment for firms, how much it costs to access capital and things like that.

Chinese numbers are very often about politics. But eventually you have the situation where the politics have to meet the economics. You can’t tell the wrong story over and over and over again.

What are some things you are looking at the moment?

We see some sectors that do better over time, but overall there’s a very obvious and clear sweep downward. We track revenue growth; we track volumes, outputs, sales. We track receivables and payables of firms but at the same time the important things these days is actually looking at the credit data.

We track the interest rates paid both through banks as well as non-banks, so we have the only shadow banking interest rates in the world on China right now.

What does this shadow banking data tell you?

What we noted in 2013 by actually tracking firm performance was, yes, you could push out as much credit as you want but if it all goes to a privileged corporate elite at subsidized rates and the rest is only available perhaps through the shadow market to small, medium-sized enterprises, then the credit transmission mechanism is broken. It doesn’t matter how much credit you’re pushing out, it’s not truly expanding, at least growth is not.

That was the story of 2013 when loan demand was still strong. What we saw in 2014, especially the last two quarters is that loan demand had actually plummeted. Capex, and capex expectations were plummeting so unlike 2013 when firms really wanted credit, but couldn’t get it, in 2014 they were pushing more and more credit out the door, and yet firms didn’t want it.

They were borrowing less and they were spending less, so the slowdown of 2013 was actually a very different dynamic than the slowdown of 2014. It’s very important to understand that this isn’t one long trajectory, the Chinese economy is actually changing, in terms of what it expects and what firms need going forward.

If growth is slowing, what about stimulus?

GDP is for public consumption. It’s a political narrative; it’s more of a media narrative than anything else. The Chinese are not going to stimulate to get to a certain target, but the central bank will stimulate in order to keep the labor market in good shape. They want to avoid societal breakdowns, so we’re talking about employment growth; we’re talking about inflation.

The economy is slow, the credit markets are a mess, but surprisingly according to our data, the labor market is very resilient and as long as the labor market is resilient, we’re talking about employment growth, we’re talking about job expectations, and there won’t be any stimulus.

We’re even talking about lower wage growth, so firms can afford to bring on workers easier. Profit margins are the highest in a year. The type of resilient labor market statistics we are still seeing and have been seeing all year indicate that the Chinese [regime] is not really worried about the state of the labor market.

What are some other risks?

I think that the biggest problem is that nobody has any visibility on debt. There are none performing loans behind the system and we don’t know the levels, they’ll never admit the levels, this is state secret number one. We’ve had asset management companies in the past gobble these off of banks and others at 100 cents on the dollar, and then they disappear. They are continually recapitalizing, debt goes off stage and you never know what the debt levels are.

This is ok as long as the markets don’t worry about it and people don’t really have an idea of what’s going on. At any given time, it could start worrying people and that could affect foreign direct investment, it could affect bond prices, it could affect other things so China has a confidence issue if they let things get too out of hand and look like they are not in control of the ship.

And that’s one of the reasons they take the GDP number so serious, which is in fact a ridiculous thing to be worrying about but for them it symbolizes the idea that they’re able to manage growth, and because of that they’re able to manage their debt.

What about rebalancing toward a consumer economy?

This concept is actually several different things. It’s most popularly understood as consumption versus investment. But it’s also sectorial rebalancing. You want to move away from low margin manufacturing and other sectors like that and move toward high margin industries like services.

We were seeing a lot of sectorial rebalancing up until a few quarters ago. Since then, the data has been quite iffy. Then you’ve got geographical rebalancing, the coast for a long time has grown significantly more than inland provinces, however we’ve seen geographical rebalancing the last two and half years.

Going back to the first rebalancing, investment versus consumption, this is something people have a difficult time to understand. They can theorize on it it’s different if you actually have the numbers for it.

We look at it through proxies such as capex, capex expectations, and on the consumption side, retail. What we’re seeing the last two quarters is a significant drop in capex. So firms are reacting to this slowdown in a way they never have before, which is by stopping spending and by stopping borrowing as well.

But the reality is that while investment is dropping, retail is not picking up the slack. So you’re not seeing this retail sector that’s blowing out; you’re not going to be able to see a rebalancing that takes a simple drop in investment, and takes a jump in consumption and balances things out and somehow you have a nice GDP number.

The reality is: While consumption will increase as financial repression is pulled back from a policy standpoint, you’re going to be able to replace the push that investments have given. So you’re going to see a slowdown over time and in fact China Beige Book’s view on this is: Best case scenario—China slows down. Worst case scenario—China slows down, but there are various ways of slowing down, some healthier than others.

I think that the one point for people who are watching the Chinese economy and are concerned about what they don’t know to take away is this: People have assumed China had figured out economics in a way that nobody else has. Eight percent growth; we don’t really understand how they’re getting that number but they’re getting it somehow and they’ll continue to get it.

Economics are economics, the Chinese economy is slowing down and investors and policymakers and firms investing in China and companies that are relevant to China need to understand is: You’re seeing a very different China now and you will see a very different China going forward, and you better be prepared. It’s not the old world anymore.

Leland R. Miller is president of China Beige Book International. He previously worked as a lawyer across Asia and for the American Bar Association where he helped oversee the organization’s review of the Chinese banking system.